After breaking through the 40,000 point mark in March, the Nikkei 225 index hit a new all-time high on July 4, reaching 40,913.65 points for the first time in three months. Schroders' latest research suggests that considering the recent upward trend since the beginning of the year, Japanese stocks may take a breather. However, due to Japan's ongoing structural changes, the bank remains positive about the Japanese stock market. Reasons for the recent market rise The recent two-week rise has been mainly driven by large-cap stocks, which is more evident against the backdrop of a weak yen and rising long-term interest rates in Japan. In fact, the Bank of Japan decided to keep its policy rate unchanged at 0-0.1% in its June monetary policy meeting, and announced plans to announce a detailed reduction of Japan's government bond purchasing plan at its July meeting, cooling expectations for the central bank to tighten monetary policy early, leading to a weakening yen and the USD/JPY falling below 160. At the same time, the market has begun to digest expectations of quantitative tightening, pushing the yield on 10-year Japanese government bonds above 1%. This situation is favorable for large financial and export-oriented companies. Regarding the yen, the exchange rate will indeed be affected by US inflation and the Federal Reserve's rate cut path. Up to now, the situation of high long-term interest rates in the US has put enormous pressure on the yen, but the bank expects this pressure to ease later this year. In fact, with the improvement of the macroeconomic background, the Bank of Japan has begun to gradually return to normal from its unconventional ultra-loose monetary policy. In addition, the Federal Reserve's shift in monetary policy is also becoming clearer, which may strengthen the yen in the future. Considering the current interest rate differential between the US and Japan, the upside risk of the yen (which could seriously weaken the profitability of export companies) should be limited. Given Japan's Consumer Price Index up to May (2.8%), Japan is unlikely to experience the high-rate scenario like the US. The recovery of the yen should alleviate the inflation pressure currently restraining household consumption. Long-awaited wage growth that is expected to boost domestic demand is on the horizon More importantly, the influential results of this year's labor-management negotiations show that wage increases have exceeded last year and ultimately surpassed the current inflation rate. In addition, Japanese companies have been overcoming deflation norms. According to the Bank of Japan's June Tankan survey, Japanese companies have been raising prices for the past three years. This is almost the fastest continuous price increase in decades. The change in economic norms should help Japanese companies improve profit margins and maintain steady profit growth, thereby redistributing increasing wealth to employees. Schroders believes that the long-awaited wage-price spiral growth that is expected to boost domestic demand is about to become a reality. In addition, considering the steady trend in profits, as well as the urgent need in an aging society for digital transformation and automation, the bank expects strong capital expenditure by Japanese companies. Overall, Japan is transitioning from three lost decades of economic, price, and wage stagnation to a normal economic environment with positive growth. Currently, the market is focused on short-term macro factors, namely rising rates and a weaker yen. Later this year, Schroders expects investors to take advantage of ongoing structural changes, expand investment opportunities, and focus on the fundamental factors and competitive advantages of individual companies.